Investec Asset Management Dumps Inflation Bonds on Commodities

Investec Asset Management sold all its short-maturity index-linked bonds as tumbling raw materials prices reduced the need for protection against inflation.

“An impact of falling commodity prices is washing through the inflation market,” Russell Silberston, a London-based money manager, said in a phone interview on May 28. The company has $105 billion under management, according to its website. “Commodities are not doing well because of concern about global growth, especially in China.”

Inflation-protected bonds handed investors a 3 percent loss this month, the worst performance since October 2008, according to Bank of America Merrill Lynch’s Global Inflation-Linked Government Index. The Standard & Poor’s GSCI gauge of 24 raw materials dropped 8.7 percent from its high this year reached in February as slowing growth in China crimped demand for raw materials. Gold fell 16 percent this year.

The two-year U.S. break-even rate, a market gauge of inflation expectations derived from the yield gap between regular and index-linked bonds, dropped to 1.31 percentage points at 9:43 a.m. London time, reaching the least since Dec. 20, and falling from as high as 2.41 percentage points in March. The five-year break-even rate in the U.K. fell to 2.92 percentage points, from 3.31 percentage points last month, the highest since July 2008.

The International Monetary fund cut its forecast for 2013 global economic growth to 3.3 percent from 3.5 percent on April 16. Chinese Premier Li Keqiang told German business leaders on May 27 that his country is confronted by “huge challenges.”

Investec Asset Management sold index-linked securities with maturities of up to five years “a while back,” Silberston said. It retained longer-dated bonds, and it would buy back shorter-maturity notes if they fall further because “central banks won’t let inflation expectations fall too far,” he said.

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